Question
6. Employee stock ownership plans (ESOPs) Indicate whether each of the following statements related to employee stock ownership plans (ESOPs) increases or decreases value for
6. Employee stock ownership plans (ESOPs)
Indicate whether each of the following statements related to employee stock ownership plans (ESOPs) increases or decreases value for outside stockholders:
ESOP Statements | Value for Outside Stockholders |
---|---|
In theory, employees who have equity in a firm will be motivated to work harder and smarter. | ___________ |
The creation of an ESOP is a form of additional compensation to employees. (Assume that the firm would have to provide this additional compensation in a different way if it did not create an ESOP.) | ____________ |
Creating an ESOP can be a powerful tool in warding off takeovers. | ____________ |
Big T Burgers and Fries Corp. recently created an ESOP. The company issued 200,000 new shares of stock at $50 per share, which it sold to the ESOP. The ESOP borrowed $10 million to purchase the newly issued shares from the company. The financial institution was willing to lend the money to the ESOP, because Big T Burgers and Fries Corp. signed a guarantee for the loan. The firm used the money from the ESOP to repurchase its shares on the open market at $50 per share.
Which of the following statements describes the net effect of these transactions on the companys cash balance?
a) The companys cash balance will decrease by $10 million at the end of these transactions.
b) he companys cash balance will increase by $10 million at the end of these transactions.
c) The companys cash balance will be unchanged at the end of these transactions.
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